The Bank of England said Friday that banks, building societies and investment firms in the U.K. would need to issue about $41 billion in new debt by 2020 to comply with European Union rules intended to reduce the need for bailouts.
The new rules, known as the minimum requirement for own funds and eligible liabilities (MREL), require European banks and other regulated financial institutions to maintain sufficient equity and other liabilities to absorb losses in a time of financial stress, according to the New York Times. The goal is to minimize risk for the overall financial system while protecting depositors.
Under the rules, banks would issue debt that could be converted to equity and holders of that debt and other investors would have to shoulder losses.
“The implementation of MREL is a crucial step forward in ensuring that any bank, large or small, carries sufficient resources to be resolved in an orderly way, without recourse to public subsidy and without disruption to the wider financial system,” Mark J. Carney, the governor of the Bank of England, said in a news release.
The bank said lenders and other regulated financial institutions would need 223 billion pounds ($340 billion) in such debt to comply with the rules. The bulk would come from existing debt that is expected to mature in the next four years and would be reissued to comply with the new rules.
As a result, banks and other regulated entities in Britain would need to issue about 27 billion ($41 billion) in new debt by January 2020, when the regulations go into effect. The Bank of England estimates it will cost the financial industry 1.4 billion pounds annually to service the new debt.
The Wall Street Journal said the new regulatory demands “could have been a lot worse.”
“Th[e] increase in annual interest costs is equivalent to about 7% of one year’s pre-tax profits, which sounds high,” it said. “However, without these and other rules designed to stabilize a failing bank, more equity would be needed instead.”
If the gap was instead funded with capital at a cost of 10%, that would entail extra costs of about 11 billion pounds annually, according to the WSJ.